Donald Trump was elected the 45th president of the United States of America. What does this mean for our estate tax laws?
One of President-Elect Trump’s campaign promises was to eliminate the federal estate tax, a forty percent (40%) tax that is imposed on estate asset transfers in excess of $5.45M (indexed annually for inflation). Who would this affect from the payor’s perspective? Who would this affect from the payee’s perspective? What impact would a reduction in the estate tax have on our federal tax revenue? To understand the answer to these questions, we must first understand the current state of our estate and gift tax (i.e. transfer tax).
Current Estate Tax
Currently, in 2016, each individual has a $5.45M exemption from federal transfer tax that they can apply to transfers of assets made during life or upon death. Any transfer made in excess of the exemption will result in a 40% transfer tax (also known as an “estate tax” for transfers at death or “gift tax” for transfers during life). A married couple can apply both spouses’ $5.45M exemption towards their joint estate, for a total exemption amount of $10.9M.
Current Capital Gains At Death
Under the current law, the basis of an individual’s assets will adjust to fair market value as of the date of death of that individual. Typically, this adjustment results in a step-up in basis (rather than a step-down). For more information on basis, please see our previous blog post entitled “Think Three Times Before Gifting Real Property: The Interplay of Gift Tax, Capital Gains Tax and Property Tax.” Receiving a step-up in basis can result in significant tax advantages for a deceased person’s heirs because they have the ability to avoid paying a capital gains tax, which can be a significant tax, particularly on a highly appreciated asset.
Proposed Repeal of Estate Tax
President-Elect Trump has proposed eliminating the estate tax. Citizens would be able to pass assets of any amount to their heirs without the obligation to pay any estate tax at the federal level. In 2015, the federal government collected approximately $17B in estate taxes. This source of revenue would be extinguished if the estate tax is repealed. However, under President-Elect Donald Trump’s proposed estate tax changes, he also suggests modifications to the capital gains laws, which would affect the basis of a deceased individual’s assets, and possibly increase federal tax revenue in an area that revenue is not currently generated.
Proposed Changes to Capital Gains Tax Upon Death
The President-Elect further proposed that a deceased individual could pass up to $10M of gain to their heirs without incurring a federal capital gains tax. All assets passed to heirs that exceed a $10M gain would be subject to a federal capital gains tax as to the gain. It is unclear what event would trigger the gain. Would the gain be triggered automatically at death? Or would the gain be triggered by the usual events that trigger gain (such as a sale)? This is a point that needs further clarification. Assessing a capital gain tax on assets that otherwise would not be subject to such taxation could be significant to the deceased’s state’s revenue as well, since most states impose a state-level capital gains tax, but not all states impose an estate tax.
The changes that President-Elect Donald Trump proposed during his campaign could have significant consequences for taxpayers and tax planners alike. To discuss tax planning strategies, please contact one of our Trusts & Estates lawyers. Stay tuned for more information on if and how the estate tax changes!
Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Tiffany Halimi, by email at firstname.lastname@example.org or telephonically at (213) 629-5700.
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